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The debt trap

The decision of the WB to restore lending to Pakistan to the pre-1999 level is a major shift in the policy

From Shamim Ahmed Rizvi,
May 14 - 20, 2001

The World Bank has decided in principle to lend 700 million dollars to Pakistan under its project and structural adjustment credit programme by the end of the current calendar year, marking resumption of its lending, which was discontinued in the wake of Kargil episode and military take over in Oct 1999. Finance Minister Shaukat Aziz, who had met the WB President James Wolfenshon in Washington told newsmen on his return that the World Bank will also extend 180 million dollars aid to Pakistan to overcome the impact of drought that has seriously affected the nation's agriculture sector. Shaukat Aziz also met IMF Executive Director Horst Kohler in Washington.

The decision of the World Bank to restore lending to Pakistan to the pre-1999 level is a major shift in the policy of the Bretten Woods institutions which have just held their spring meeting in Washington. This restoration of full assistance seems to be part of the American policy to delink political issues such as nuclear non-proliferation and the signing of the CTBT from matters of economic assistance.

Earlier the Executive Director of the World Bank Franco Passacantando on a visit to Pakistan, told newsmen at a press conference in Islamabad that fast implementation of the reforms were two main concern of Bank. Pakistan was implementing reforms and the Bank felt satisfied with its efforts. The government has promised to put in place an institutional arrangement before it leaves office by October 2002, to ensure continuity and consistency of the reform process. He said this issue was raised many times by the Bank, "What's next after October 2002". However, he felt that once strong and prudent reform measures are instituted, it would be very difficult for the future government to reverse them. "Like privatisation of state-owned enterprises, regulatory framework, tax reforms—no government would like to undo all this," he maintained.

Franco Passacantando, who spoke on behalf of the visiting team of executive directors, said that social service delivery, governance, civil service reforms, tax and financial sector reforms, drought situation, privatization, anti-corruption campaign and devolution of power were some of the issues they talked about during their meetings with Chief Executive General Pervez Musharraf, Finance Minister Shaukat Aziz and other government functionaries. "Generally we are pleased with the improved macro-economic environment.

Franco Passacantando said that the Executive Director felt comfortable with the discussion the Bank's management is having with the government to support the programme. The Bank has indicated to take up $350 million Structural Adjustment Credit (SAC) and few project related loans before end of the current fiscal year.

"In conclusion, the visiting executive directors felt that Pakistan has great potential for development and progress. Directors will take this impression back to the Bank's Board with the aim of creating a better understanding within the Board of the situation in Pakistan".

Franco Passacantando maintained that the Bank is an economic institution, and usually focuses on related matters. "However, if a political situation has the potential to affect or derail the reform process, we take that into account, " he said.

On the question of zero lending to Pakistan for the last 18 months, which being a developing country is not tenable, the executive directors maintained that Pakistan seeks Bank support for balance of payments support, which requires the International Monetary Fund on board all the time.

The conditionalities of the IMF have, however, been bitterly criticised as being too harsh at a meeting of the group of 24 developing countries in Washington which was also attended by Finance Minister Shaukat Aziz. The group has contended that the conditionalities had become too excessive and harsh during the last decade in both magnitude and scope even in areas that lay "outside the Fund's mandate and expertise". Accordingly, the IMF has been asked by the group to take into account, while fixing targets and pre-scribing conditionalities, the institutional capacity and domestic legislative processes of aid recipient countries. In fact, the "excessively broad and detailed conditionalities" rob the programme of its indigenous content and convey the impression of being externally conceived and imposed which alienates the people from the programme and makes its implementation unduly difficult. The complaint of the group that the IMF and the World Bank do not practice the "principle of uniformity of treatment" of all countries is not without a basis. Very often politics is mixed up with pure economic issues and considerations.

The resumption of the project and structural adjustment credit to Pakistan by the World Bank certainly marks a shift in its policy towards Islamabad, which may, however, be projected by the present government as a success of its economic policies and the international financial institution's confidence in its economic agenda. It is, however, in no way a development to rejoice, as the lending agencies traditionally feel comfortable in dealing with in the context of their conditionalities, since non-elected government are not considered answerable. Besides, the major cause of Pakistan's economic crisis is the foreign debt, which consumes almost half of the nation's hard earned foreign exchange in debt servicing annually. The debt trap, faced by the nation today, is the natural consequence of the previous governments' frenzied borrowings for survival.